<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF
1934
For transition period from
Commission File Number: 0-26086
YARDVILLE NATIONAL BANCORP
--------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2670267
-------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3111 Quakerbridge Road, Mercerville, New Jersey 08619
-----------------------------------------------------
(Address of principal executive offices)
(609) 585-5100
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 1998
Common Stock, no par value 4,968,174
- -------------------------- ----------------------------
Class Number of shares outstanding
1
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INDEX
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Statements of Condition
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
PART 2 OTHER INFORMATION
- -----------------------------------
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Securities Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 32
Exhibit 27.1 Financial Data Schedule 33
2
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Item 1. Financial Statements
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
---------------- ----------------
(in thousands, except for share data) 1998 1997
---------------- ----------------
<S> <C> <C>
Assets:
Cash and due from banks $ 14,080 $ 18,923
Federal funds sold 3,870 1,500
---------- -----------
Cash and Cash Equivalents 17,950 20,423
---------- -----------
Interest bearing deposits 1,360 2,219
Securities available for sale 192,614 159,724
Investment securities (market value of $28,445 in 1998 and
$26,848 in 1997) 28,111 26,912
Loans 459,467 385,751
Less: Allowance for loan losses (6,229) (5,570)
---------- -----------
Loans, net 453,238 380,181
Bank premises and equipment, net 6,111 5,192
Other real estate 5,084 3,171
Other assets 21,204 16,864
---------- -----------
Total Assets $ 725,672 $614,686
---------- -----------
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 67,947 $ 66,560
Interest bearing 419,624 356,384
---------- -----------
Total Deposits 487,571 422,944
---------- -----------
Borrowed funds
Securities sold under agreements to repurchase 103,310 100,050
Other 75,561 34,266
---------- -----------
Total Borrowed Funds 178,871 134,316
Company - obligated Mandatorily Redeemable Trust Preferred
Securities of Subsidiary Trust holding solely junior
Subordinated Debentures of the Company 11,500 11,500
Other liabilities 7,157 6,181
---------- -----------
Total Liabilities $ 685,099 $574,941
---------- -----------
Stockholders' equity
Preferred stock: no par value
Authorized 1,000,000 shares, none issued
Common Stock: no par value
Authorized 12,000,000 shares
Issued and outstanding 4,968,174 in 1998
and 5,082,050 shares in 1997 20,399 17,703
Surplus 2,205 2,205
Undivided profits 20,393 19,713
Common stock in treasury, at cost:
170,300 shares in 1998 (3,008) --
Accumulated other comprehensive income 584 124
---------- -----------
Total Stockholders' Equity 40,573 39,745
---------- -----------
Total Liabilities and Stockholders' Equity $ 725,672 $614,686
---------- -----------
</TABLE>
Shares and related amounts adjusted for two-for-one stock split declared
December 23, 1997 and 2.5% stock dividend declared March 25, 1998.
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
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Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
(in thousands, except for share data) 1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,922 $ 8,106
Interest on deposits with banks 76 34
Interest on securities available for sale 2,791 1,661
Interest on investment securities:
Taxable 192 311
Exempt from Federal income tax 165 100
Interest on Federal funds sold 63 45
------------ -----------
Total Interest Income 13,209 10,257
------------ -----------
INTEREST EXPENSE:
Interest on savings account deposits 1,320 1,285
Interest on certificates of deposit of $100,000 or more 352 320
Interest on other time deposits 3,146 2,551
Interest on borrowed funds 2,371 1,060
Interest on trust preferred securities 266 --
------------ -----------
Total Interest Expense 7,455 5,216
------------ -----------
Net Interest Income 5,754 5,041
Less provision for loan losses 500 275
------------ -----------
Net Interest Income After Provision for Loan Losses 5,254 4,766
------------ -----------
NON-INTEREST INCOME:
Service charges on deposit accounts 317 307
Gains on sales of mortgages, net 11 12
Security gains, net 24 4
Other non-interest income 444 324
------------ -----------
Total Non-Interest Income 796 647
------------ -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,120 1,880
Occupancy expense, net 286 253
Equipment 320 281
Other non-interest expense 1,186 1,047
------------ -----------
Total Non-Interest Expense 3,912 3,461
------------ -----------
Income before income tax expense 2,138 1,952
Income tax expense 730 687
------------ -----------
Net Income $ 1,408 $ 1,265
------------ -----------
EARNINGS PER SHARE:
Basic $ 0.28 $ 0.25
Diluted $ 0.28 $ 0.25
------------ -----------
Weighted average shares outstanding:
Basic 4,970 5,071
Diluted 5,013 5,135
------------ -----------
</TABLE>
Shares and related amounts adjusted for two-for-one stock split declared
December 23, 1997 and 2.5% stock dividend declared March 25, 1998.
See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------- ----------------
(in thousands, except for share data) 1998 1997
---------------- ----------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 28,064 $ 23,202
Interest on deposits with banks 159 66
Interest on securities available for sale 7,845 4,990
Interest on investment securities:
Taxable 650 982
Exempt from Federal income tax 402 302
Interest on Federal funds sold 201 281
----------- --------------
Total Interest Income 37,321 29,823
----------- --------------
INTEREST EXPENSE:
Interest on savings account deposits 3,822 3,803
Interest on certificates of deposit of $100,000 or more 992 964
Interest on other time deposits 8,750 7,193
Interest on borrowed funds 6,348 3,276
Interest on trust preferred securities 798 --
----------- --------------
Total Interest Expense 20,710 15,236
----------- --------------
Net Interest Income 16,611 14,587
Less provision for loan losses 1,400 850
----------- --------------
Net Interest Income After Provision for Loan Losses 15,211 13,737
----------- --------------
NON-INTEREST INCOME:
Service charges on deposit accounts 937 877
Gains on sales of mortgages, net 36 21
Security gains, net 70 11
Other non-interest income 1,173 978
----------- --------------
Total Non-Interest Income 2,216 1,887
----------- --------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 6,060 5,549
Occupancy expense, net 781 728
Equipment 938 809
Other non-interest expense 3,310 2,784
----------- --------------
Total Non-Interest Expense 11,089 9,870
----------- --------------
Income before income tax expense 6,338 5,754
Income tax expense 2,214 2,022
----------- --------------
Net Income $ 4,124 $ 3,732
----------- --------------
EARNINGS PER SHARE:
Basic $ 0.82 $ 0.74
Diluted $ 0.81 $ 0.73
----------- --------------
Weighted average shares outstanding:
Basic 5,034 5,043
Diluted 5,077 5,107
----------- --------------
</TABLE>
Shares and related amounts adjusted for two-for-one stock split declared
December 23, 1997 and 2.5% stock dividend declared March 25, 1998.
See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
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Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------- ----------------
(in thousands) 1998 1997
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 4,124 $ 3,732
Adjustments:
Provision for loan losses 1,400 850
Depreciation 682 615
Amortization and accretion 645 336
Gains on sales of securities available for sale (70) (11)
Loss on sales of other real estate 5 --
Writedown of other real estate 337 498
Increase in other assets (4,572) (595)
Increase in other liabilities 976 1,104
----------- -----------
Net Cash Provided by Operating Activities 3,527 6,529
----------- -----------
Cash Flows From Investing Activities:
Net increase (decrease) in interest bearing deposits 859 (1,556)
Purchase of securities available for sale (121,627) (48,298)
Maturities, calls, and paydowns of securities available
for sale 60,271 40,498
Proceeds from sales of securities available for sale 28,693 3,012
Proceeds from maturities and paydowns of investment
securities 7,361 3,632
Purchase of investment securities (8,670) (267)
Net increase in loans (76,970) (32,426)
Expenditures for bank premises and equipment (1,601) (357)
Capital improvements to other real estate -- (350)
Proceeds from sale of other real estate 258 --
----------- ------------
Net Cash Used by Investing Activities (111,426) (36,112)
----------- -------------
Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
money market, and savings deposits 9,042 27,024
Net increase in certificates of deposit 55,585 23,958
Net increase (decrease) in borrowed funds 44,555 (16,921)
Proceeds from issuance of common stock 330 391
Treasury shares acquired (3,008) --
Dividends paid (1,078) (911)
----------- -------------
Net Cash Provided by Financing Activities 105,426 33,541
----------- -------------
Net increase in cash and cash equivalents (2,473) 3,958
Cash and cash equivalents as of beginning of period 20,423 17,150
----------- --------------
Cash and Cash Equivalents as of End of Period $ 17,950 $ 21,108
----------- --------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during period for:
Interest expense 19,074 14,300
Income taxes 2,604 2,777
----------- -------------
Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers to other real estate from loans, net of 2,513 2,958
charge offs ----------- -------------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
<PAGE>
Yardville National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation:
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenue and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses and the valuation reserve of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and other
real estate, management obtains independent appraisals for significant
properties.
The consolidated financial data as of and for the three and nine months ended
September 30, 1998 includes, in the opinion of management, all adjustments,
consisting of only normal recurring accruals necessary for a fair presentation
of such periods. The consolidated financial data for the interim periods
presented is not necessarily indicative of the result of operations that might
be expected for the entire year ending December 31, 1998.
Consolidation
The consolidated financial statements include the accounts of Yardville National
Bancorp (the "Holding Company") and its subsidiaries, Yardville Capital Trust
(the "Trust") and Yardville National Bank (the "Bank") and the Bank's wholly
owned subsidiaries, Yardville National Investment Corporation, Brendan Inc.,
Nancy Beth Inc., Jim Mary Inc., Yardville Real Estate Corporation, and YNB
Financial Services, Inc., (collectively, "YNB"). All significant inter-company
accounts and transactions have been eliminated. Brendan Inc., Nancy Beth Inc.
and Jim Mary Inc. are utilized for the control and disposal of other real estate
properties. Yardville Real Estate Corporation is utilized to hold Bank branch
properties and YNB Financial Services, Inc., provides alternative investment
services.
Allowance for Loan Losses
For financial reporting purposes, the provision for loan losses charged to
operating expense is determined by management and based upon a periodic review
of the loan portfolio, past experience, the economy, and other factors that may
affect a borrower's ability to repay the loan. This provision is based on
management's estimates, and actual losses may vary from these estimates. These
estimates are reviewed and adjustments, as they become necessary, are reported
in the periods in which they become known. Management believes that the
7
<PAGE>
allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions, particularly in New
Jersey. In addition, various regulatory agencies, as an integral part of their
examination process periodically review the Bank's allowance for loan losses and
the valuation of other real estate. Such agencies may require the Bank to
recognize additions to the allowance or adjustments to the carrying value of
other real estate based on their judgement about information available at the
time of their examination.
Company - Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On October 16, 1997, Yardville Capital Trust, a statutory business trust, and a
wholly owned subsidiary of the Holding Company, issued $11,500,000 of 9.25%
Trust Preferred Securities and $356,000 of 9.25% Common Securities to the
Holding Company. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by the Trust to purchase $11,856,000 of 9.25% Subordinated
Debentures maturing November 1, 2027 from the Holding Company. The Trust exists
for the sole purpose of issuing Trust Preferred Securities and investing the
proceeds into Subordinated Debentures of the Holding Company. These Subordinated
Debentures constitute the sole assets of the Trust.
2. Earnings Per Share
Weighted average shares for the basic net income per share calculation for the
three months ended September 30, 1998 and 1997 were 4,970,000 and 5,071,000
respectively. For the diluted net income per share computation, potential common
stock of 43,000 and 64,000 are included for the three months ended September 30,
1998 and 1997, respectively.
Weighted average shares for the basic net income per share calculation for the
nine months ended September 30, 1998 and 1997 were 5,034,000 and 5,043,000
respectively. For the diluted net income per share computation, potential common
stock of 43,000 and 64,000 are included for the nine months ended September 30,
1998 and 1997, respectively.
3. Recently Issued Accounting Standards
SFAS No. 130
FASB Statement No. 130 "Reporting Comprehensive Income" (Statement 130)
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Statement 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
8
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Statement 130 requires an enterprise to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes are required. YNB adopted Statement No. 130 on
January 1, 1998 and the disclosure is contained in the table below.
<TABLE>
<CAPTION>
Comprehensive Income Three Months Ended September 30,
----------------------------------------------------------------------------------------
(in thousands) 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 2,138 $ 1,265
----------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain for the
period, net of tax 762 189
Reclassification of realized net gain on sale of
securities available for sale, net of tax 16 3
----------------------------------------------------------------------------------------
Holding gain arising during the period,
net of tax and reclassification 778 192
Reclassification adjustment for realized net
gains, net of tax (16) (3)
------------------------------------------------------------------------------------------
Other comprehensive income for the period net of tax 762 189
------------------------------------------------------------------------------------------
Total comprehensive income $ 3,662 1,454
------------------------------------------------------------------------------------------
Comprehensive Income Nine Months Ended September 30,
----------------------------------------------------------------------------------------
(in thousands) 1998 1997
----------------------------------------------------------------------------------------
Net Income $ 4,124 $ 3,732
----------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain (loss) for the
period, net of tax 460 331
Reclassification of realized net gain on sale of
securities available for sale, net of tax 46 7
----------------------------------------------------------------------------------------
Holding gain (loss) arising during the period,
net of tax and reclassification 506 338
Reclassification adjustment for realized net
gains, net of tax (46) (7)
----------------------------------------------------------------------------------------
Other comprehensive income for the period net of tax 460 331
----------------------------------------------------------------------------------------
Total comprehensive income $ 4,674 4,063
----------------------------------------------------------------------------------------
</TABLE>
SFAS No. 133
In June 1998, the FASB issued SAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet, either as an asset, or as a liability, measured at its fair value. The
Statement requires that changes in the derivative's fair value shall be
recognized in current earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related
9
<PAGE>
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance but the statement cannot be applied retroactively. SAS
No. 133 must be applied to derivative instruments and certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1997.
YNB does not currently have derivative or hedged instruments and management does
not anticipate the statement having a material impact on its financial position
or results of operations. However, management continues to closely evaluate the
use of derivatives to reduce interest rate risk.
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This financial review presents management's discussion and analysis of the
financial condition and results of operation. It should be read in conjunction
with the 1997 Annual Report to stockholders and Form 10-K for the fiscal year
ended December 31, 1997 as well as with the unaudited consolidated financial
statements and the accompanying notes.
This Form 10-Q report contains express and implied statements relating to the
future financial condition, results of operations, plans, objectives,
performance, and business of YNB, which are considered forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These include statements that relate to, among other things,
profitability, liquidity, loan loss reserve adequacy, plans for growth, interest
rate sensitivity, market risk, and year 2000 issues. Actual results may differ
materially from those expected or implied as a result of certain risks and
uncertainties, including, but not limited to, changes in economic conditions,
interest rate fluctuations, continued levels of loan quality and origination
volume, successful implementation of year 2000 technology changes by YNB, its
vendors and suppliers, competitive product and pricing pressures within YNB's
markets, continued relationships with major customers including sources for
loans and deposits, personal and corporate customers' bankruptcies, legal and
regulatory barriers and structure, inflation, and technological changes, as well
as other risks and uncertainties detailed from time to time in the filings of
YNB with the Securities and Exchange Commission.
Financial Condition
Assets
Total consolidated assets at September 30, 1998 were $725,672,000 an increase of
$110,986,000 or 18.1% compared to $614,686,000 at December 31, 1997. The growth
in YNB's asset base, during the first nine months of 1998, was primarily due to
increases in loans and available for
10
<PAGE>
sale securities. YNB's commercial loan portfolio continued to expand during this
time period. The increase in the loan portfolio was the product of an ongoing
consistent strategy to improve the profitability of the organization through
relationship banking. In the last quarter of 1997, $7,500,000 was contributed to
the Bank as a result of YNB's Trust Preferred Securities Offering. The increase
in the Bank's legal lending limit allows management to establish larger loan
relationships. The pace of consolidation in YNB's market place continues at a
rapid rate. Management anticipates continued loan opportunities due to this
consolidation. YNB's asset base includes investments of approximately
$153,293,000 purchased utilizing primarily repurchase agreements and Federal
Home Loan Bank advances (Investment Growth Strategy). The Investment Growth
Strategy at September 30, 1998 increased $45,093,000 or 41.7% from the reported
total of $108,200,000 at December 31, 1997. The primary goals of the Investment
Growth Strategy of improving return on equity and earnings per share continue to
be achieved.
Cash and due from banks
Cash and due from bank balances decreased $4,843,000 to $14,080,000 at September
30, 1998 when compared to the $18,923,000 balance at December 31, 1997. In April
of 1998, YNB began a reserve requirement reduction program. This program allows
the Bank to reduce the amount of demand and interest bearing demand balances
subject to reserve requirements. Prior to starting the program, the Bank
maintained non-interest bearing reserve balances at the Federal Reserve Bank of
Philadelphia of between $3,000,000 and $4,000,000. With the implementation of
the program, the bank has been able to reduce to zero the amount of funds
required to be maintained at the Federal Reserve Bank of Philadelphia, for
reserve requirements. These funds are now available to be invested in earning
assets.
Federal funds sold
At September 30, 1998 Federal funds sold totaled $3,870,000 compared to
$1,500,000 at December 31, 1997. Average Federal funds sold for the first nine
months was $4,826,000. The Federal funds sold level experienced at September 30,
1998 was due to increased certificate of deposit (CD) balances. The Fed funds
position is reflective of management's pricing of time deposits offset by loan
growth experienced. Management remains focused on maintaining adequate liquidity
to fund loan growth and to meet daily liquidity requirements
Securities
The following tables present the amortized cost and market values of YNB's
securities portfolios as of September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Available For Sale Securities September 30, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other US
government agency securities $66,840 $67,322 $ 62,465 $ 62,540
Mortgage-backed securities 119,591 120,003 91,193 91,316
Corporate obligations 755 760 3,297 3,306
All other securities 4,529 4,529 2,562 2,562
- ---------------------------------------------------------------------------------------------------------------
Total $191,715 $192,614 $ 159,517 $ 159,724
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Investment Securities September 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of state and
political subdivisions $16,709 $17,080 $ 8,819 $ 8,957
Mortgage-backed securities 11,402 11,365 18,093 17,891
- --------------------------------------------------------------------------------------------------------------
Total $28,111 $28,445 $ 26,912 $ 26,848
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Unpledged available for sale securities represent a secondary source of
liquidity for YNB. Securities represented 30.4% of total assets at both
September 30, 1998 and December 31, 1997.Total securities increased $34,089,000
or 18.3% at September 30, 1998 to $220,725,000 compared to $186,636,000 at
year-end 1997. The available for sale portfolio represents 87.3% of the total
security holdings of YNB at September 30, 1998, compared to 85.6% at year-end
1997
The net unrealized gain on available for sale securities as of September 30,
1998 was $899,000, compared to a net unrealized gain of $207,000 at December 31,
1997. Net unrealized gain, net of tax effect, totaling $584,000 was reported in
Accumulated Other Comprehensive Income in Stockholders' Equity at September 30,
1998, compared to a net unrealized gain of $124,000 reported at December 31,
1997. The increase in the unrealized gain on available for sale securities is
primarily due to the decline in interest rates from December 31, 1997 to
September 30, 1998.
Securities available for sale increased $32,890,000 or 20.6% at September 30,
1998, when compared to the December 31, 1997 balance of $159,724,000. The
largest area of increase was in mortgage backed securities, which increased
$28,687,000 and account for 87.2% of the increase in available for sale
securities. The increase was primarily due to the purchase of fixed and floating
rate mortgage backed securities related to the Investment Growth Strategy.
Offsetting this increase, were the sales of securities that due to their small
size, prepayment outlook, or risk profile, was no longer a benefit to YNB. A
secondary factor limiting the growth in available for sale securities, were
increased prepayment speeds on both fixed and floating rate mortgage related
securities. Management anticipates principal paydowns in its mortgage-related
securities to continue at the current high levels, unless overall interest rates
increase. To mitigate the impact of prepayments, management has sold higher
coupon fixed rate mortgage backed securities and purchased lower coupon fixed
rate mortgage backed securities that should prepay at slower speeds.
The Investment Growth Strategy was increased $45,046,000 over the year-end 1997
level. The growth was in fixed and adjustable rate mortgage backed securities,
and agency callable bonds, which increased $27,358,000, $13,457,000 and
$10,000,000 respectively. Offsetting these increases, was a decline of
$5,769,000 in floating rate collateralized mortgage obligations.
12
<PAGE>
Investment securities increased $1,199,000 or 4.5% to $28,111,000 at September
30, 1998 from $26,912,000 at December 31, 1997. The increase resulted from the
purchases of longer term fixed rate tax-free municipal bonds that increased
$7,890,000 to $16,709,000 at September 30, 1998 compared to $8,819,000 at
December 31, 1997. Offsetting this increase, was a decline in mortgage backed
securities of $6,691,000 to $11,402,000 at September 30, 1998 from $18,093,000
at December 31, 1997. This decrease was due to principal payments.
Loans
Total loans, net of unearned income, increased $73,716,000 or 19.1% at September
30, 1998 to $459,467,000 from $385,751,000 at December 31, 1997. YNB's loan
portfolio represented 63.3% of total assets at September 30, 1998 compared to
62.8% at December 31, 1997. YNB's lending focus continues to be on commercial
loans and commercial real estate loans. The consolidation in YNB's market place,
and Management's philosophy of relationship banking are key factors in continued
strong loan growth. Strong competition from both bank and nonbank competitors
coupled with a flat yield curve and a falling prime rate of interest could
result in comparatively lower yields on new and established lending
relationships. In addition, borrowers' concerns over the economy, real estate
prices and interest rates could all be factors in future loan growth levels.
Continued profitable loan growth is a key factor in meeting earnings growth
goals.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 9/30/98 12/31/97 Change % change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate - mortgage
Residential $ 91,597 $ 85,754 $ 5,843 6.8%
- ----------------------------------------------------------------------------------------------------------------
Commercial 153,234 134,499 18,735 13.9
- ----------------------------------------------------------------------------------------------------------------
Home equity 22,920 23,805 (885) 3.7
- ----------------------------------------------------------------------------------------------------------------
Commercial and agricultural 120,724 88,228 32,496 36.8
- ----------------------------------------------------------------------------------------------------------------
Real Estate - construction 37,142 28,182 8,960 31.8
- ----------------------------------------------------------------------------------------------------------------
Consumer 24,651 18,519 6,132 33.1
- ----------------------------------------------------------------------------------------------------------------
Other loans 9,199 6,764 2,435 36.0
- ----------------------------------------------------------------------------------------------------------------
Total loans $ 459,467 $ 385,751 $ 73,716 19.1%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The table above lists the loan growth by component for the period of December
31, 1997 to September 30, 1998. Commercial and agricultural loans had the
greatest growth increasing $32,496,000 in the period and accounting for 44.1% of
the total increase in outstanding totals. Real estate - commercial loans had the
second greatest growth increasing $18,735,000 and account for 25.4% of the total
increase in loans. This is a reflection of management's focus on these markets.
All other loan components increased with the exception of home equity loans. To
address the declining home equity loan portfolio, YNB lowered its rates on all
home equity products on March 1, 1998. In the short term, the home equity
portfolio continues to decrease but management believes that in the long term
this strategy should make YNB's home equity product more competitive in the
marketplace.
13
<PAGE>
Liabilities
The following table provides information concerning YNB' deposit base at
September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 9/30/98 12/31/97 Change % Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest bearing demand
Deposits $ 67,947 $ 66,560 $ 1,387 2.1%
- --------------------------------------------------------------------------------------------------------------------
Interest bearing demand deposits 47,222 44,520 2,702 6.1
- --------------------------------------------------------------------------------------------------------------------
Money market deposits 43,805 39,937 3,868 9.7
- --------------------------------------------------------------------------------------------------------------------
Savings deposits 74,985 75,047 (62) 0.1
- --------------------------------------------------------------------------------------------------------------------
Certificates of deposit of $100,000
or over 28,289 21,556 6,733 31.2
- --------------------------------------------------------------------------------------------------------------------
Other time deposits 225,323 175,324 49,999 28.5
- --------------------------------------------------------------------------------------------------------------------
Total $ 487,571 $ 422,944 $ 64,627 15.3%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $64,627,000 or 15.3% to $487,571,000 at
September 30, 1998 compared to $422,944,000 at December 31, 1997. Certificates
of deposit were competitively priced throughout the first nine months of 1998 to
fund net new loan growth. Growth in YNB's deposit base in 1998 continued to be
principally in higher costing certificates of deposit, which account for 87.8%
of the increase in deposits. In June, YNB began to market its certificates of
deposit through a nationwide computer based service. This service allows YNB to
have access to a wider market to raise needed funding. YNB has raised
approximately $14,147,000 from this market.
YNB continued to show moderate growth in noninterest bearing demand deposit
accounts, which increased $1,387,000 or 2.1%. Sustained growth was also
reflected in the lower cost funding sources of interest bearing checking and
money market deposit accounts. This growth resulted from YNB's overall
philosophy of building and maintaining long-term customer relationships and
remains the key to further expanding the core deposit base, which, in turn,
presents opportunities for YNB to cross-sell its services.
However, lower cost deposit growth levels are not adequate to meet current or
projected loan demand. This has resulted in an increased reliance on higher rate
certificates of deposit to provide the required funding. As a result,
certificates of deposit, the most expensive deposit-funding source, available to
YNB, increased to 52.0% of total deposits at September 30, 1998 from 46.5% at
December 31, 1997. YNB continues to seek lower cost funding sources. One source
is opening new branches to serve a wider market area. In September 1998, YNB
opened its 10th branch. Located in Pennington, New Jersey, management believes
that this branch will open strong markets for both deposit and loan products.
YNB is also in the process of opening its first branch outside of the State of
New Jersey. To be located in Newtown, Bucks County, Pennsylvania, this branch
will open new markets for YNB. Bucks County, Pennsylvania is located directly
across the Delaware River from Mercer County, New Jersey, where all of YNB's
branches are currently located. Management anticipates obtaining all regulatory
approvals and
14
<PAGE>
opening the branch in the first quarter of 1999. With the continued
consolidation in the market place, additional branch opportunities are possible
in both New Jersey and Pennsylvania.
Borrowed Funds
Borrowed funds totaled $178,871,000 at September 30, 1998 compared to
$134,316,000 at December 31, 1997. The increase for the first nine months of
1998 was $44,555,000 or 33.2%. The majority of the increase was in repurchase
agreements and FHLB advances relating to the Investment Growth Strategy, which
increased $44,260,000 or 44.2% to $144,310,000 at September 30, 1998 compared to
$100,050,000 at December 31, 1997. As shorter-term repurchase agreements have
matured, management has utilized attractively priced callable repurchase
agreements and callable FHLB advances to reduce interest expense. These
instruments typically have a maturity of five to ten years and can be called
after a lock out period ranging from one to two years. At September 30, 1998,
$102,500,000 or 71.0% of the repurchase agreements and FHLB advances funding the
investment growth strategy were callable compared to $10,000,000 or 10.0% at
year-end 1997.
YNB had Federal Home Loan Bank of New York (FHLB) advances outstanding of
$73,926,000 at September 30, 1998 compared to $29,338,000 at December 31, 1997.
As advances have matured, management has shifted FHLB advances from shorter-term
advances into callable advances. At September 30, 1998 callable advances
outstanding totaled $63,500,000 or 85.9% of the total as compared to $10,000,000
or 34.1% of the total at December 31, 1997. Callable FHLB advances have terms of
ten years and call dates ranging from one to five years.
The callable FHLB Advances and repurchase agreements have allowed YNB to lower
its borrowing costs, while at the same time extending the terms. In the event
that rates rise, the callable borrowings will be called. In the event of falling
interest rates, callable borrowings will not be called and could remain
outstanding until maturity.
YNB has the ability to borrow up to $32,684,000 from the FHLB through its line
of credit program, subject to collateral requirements. In addition, YNB is
eligible to borrow up to 30% of assets under the FHLB advance program subject to
FHLB stock requirements, collateral requirements and other restrictions. YNB
also maintains unsecured federal funds lines with four commercial banks totaling
$23,000,000 for daily funding needs. YNB's funding strategy is to rely on
deposits to fund new loan growth whenever possible and to rely on borrowed funds
as a secondary funding source for loans.
Company - Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On October 16, 1997, YNB through its subsidiary Yardville Capital Trust
completed the sale of $11,500,000, 9.25%, Trust Preferred Securities. For
regulatory capital purposes the entire amount of the issue is treated as Tier 1
capital at the Holding Company level. Approximately $7,500,000 of the proceeds
was invested in earning assets and an additional $2,965,000 was used to fund the
stock repurchase program. The remaining funds were used for various corporate
purposes.
15
<PAGE>
Capital
Stockholders' equity at September 30, 1998 totaled $40,573,000, an increase of
$828,000 or 2.1% compared to $39,745,000 at December 31, 1997. This increase
resulted from the following factors:
(i) Net income of $4,124,000 less cash dividend payment of $1,078,000.
(ii) The unrealized gain on available for sale securities was $124,000 at
December 31, 1997 compared to an unrealized gain of $584,000 at
September 30, 1998. This shift resulted in a $460,000 increase in
stockholders' equity.
(iii) Proceeds of $330,000 from exercised options.
(iv) Repurchase of 170,300 shares of Holding Company stock, which are listed
as treasury stock in the amount of $3,008,000.
The decline in the capital ratios from December 31, 1997 to September 30, 1998
was caused by asset growth exceeding the rate of capital formation. The primary
cause for the slower rate of equity capital growth was the repurchase of 170,300
shares at a total cost of $3,008,000. Because the stock repurchase program is
nearly completed, its impact on future capital formation rates will be far less
than the impact for the first nine months of 1998. Management remains committed
to keeping YNB a well-capitalized institution under the prompt corrective action
rules.
The following table sets forth regulatory capital ratios for the Holding Company
and the Bank as of September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
Amount Ratios
- --------------------------------------------------------------------------------------------------------------------
dollars in thousands 9/30/98 12/31/97 9/30/98 12/31/97
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-based capital:
Tier 1
the Holding Company $ 51,489 $ 51,121 10.3% 12.2%
the Bank 49,886 46,496 10.0 11.2
Total
the Holding Company 57,712 56,346 11.6 13.5
the Bank 56,099 51,675 11.3 12.5
- ---------------------------------------------------------------------------------------------------------------------
Tier 1 leverage:
the Holding Company $ 51,489 51,121 7.7% 9.5
the Bank 49,886 $ 46,496 7.5 8.7%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 leverage ratio of 4.0%; a Tier 1 risk-based asset
capital ratio of 4.0% and a total risked based capital ratio of 8.0%. To be
considered "well capitalized" an institution must have a minimum Tier 1 capital
and total risk-based capital ratio of 6.0% and 10.0%, respectively, and a
minimum Tier 1 leverage ratio of 5.0%. At September 30, 1998, YNB and the bank
both exceeded the above ratios required to be considered well capitalized.
On October 28, 1997, Yardville National Bancorp's Board of Directors authorized
management to repurchase up to 172,000 shares of YNB's common shares in the open
market in compliance with Rule 10b-18 under the Securities Exchange Act of 1934.
As of September 30, 1998, as part of an overall capital plan, 170,300 shares
were repurchased at an average price of $17.66 per share. The stock repurchase
program is part of an overall plan to effectively manage capital.
16
<PAGE>
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of September 30, 1998 and December 31, 1997.
Nonperforming Assets
- -------------------------------------------------------------------------------
(in thousands) 9/30/98 12/31/97
- -------------------------------------------------------------------------------
Nonaccrual loans:
- -------------------------------------------------------------------------------
Commercial and agricultural $ 858 $ 515
- -------------------------------------------------------------------------------
Real estate - mortgage 570 384
- -------------------------------------------------------------------------------
Real estate - construction 376 2,106
- -------------------------------------------------------------------------------
Consumer 21 38
- -------------------------------------------------------------------------------
Other 495 312
- -------------------------------------------------------------------------------
Total 2,320 3,355
- -------------------------------------------------------------------------------
Restructured loans -- 969
- -------------------------------------------------------------------------------
Loans 90 days or more past due:
- -------------------------------------------------------------------------------
Commercial 99 --
- -------------------------------------------------------------------------------
Real estate - mortgage 1,121 886
- -------------------------------------------------------------------------------
Consumer 4 105
- -------------------------------------------------------------------------------
Total 1,224 991
- -------------------------------------------------------------------------------
3,544 5,315
- -------------------------------------------------------------------------------
Other real estate 5,083 3,171
- -------------------------------------------------------------------------------
Total nonperforming assets $ 8,627 $ 8,486
- -------------------------------------------------------------------------------
At September 30, 1998, nonperforming loans, consisting of loans 90 days and more
past due, restructured loans and nonaccrual loans, totaled $3,544,000 compared
to $5,315,000 at December 31, 1997. Other real estate at September 30, 1998
totaled $5,083,000 compared to $3,171,000 at December 31, 1997. Total
nonperforming assets at September 30, 1998 were $8,627,000 a $141,000 or 1.7%
increase over nonperforming asset levels at December 31, 1997. Nonperforming
assets as a percentage of total assets were 1.19% at September 30, 1998 compared
to 1.38% at December 31, 1997. Nonperforming assets as a percentage of total
loans and other real estate were 1.86% at September 30, 1998 compared to 2.18%
at December 31, 1997. The improvement in these ratios is due to strong asset and
loan growth rates, offset by a modest increase in nonperforming assets. The
decrease in nonperforming loans and the increase in other real estate was
primarily due to the transfer to other real estate of one loan totaling
$2,166,000. YNB continues to actively manage nonperforming assets with the goal
of reducing these assets in relationship to the total loan portfolio. Whenever
possible, existing loan relationships are being restructured in an effort to
return these loans to performing status.
The allowance for loan losses increased to $6,229,000 or 1.36% of total loans at
September 30, 1998 compared to $5,570,000 or 1.44% of total loans at December
31, 1997. The provision for loan losses for the first nine months of 1998 was
$1,400,000 with net charge-offs totaling $741,000. The allowance for loan losses
as a percentage of nonperforming loans was 175.8% at September 30, 1998 compared
to 104.8% at December 31, 1997. At September 30, 1998 the allowance for loan
losses in management's judgement is considered adequate in relation to credit
risk exposure levels.
17
<PAGE>
Results of Operations
Net Income
YNB reported net income of $4,124,000 for the nine months ended September 30,
1998, an increase of $392,000 or 10.5% over the same period in 1997. The
increase in net income for the nine months ended September 30, 1998, compared to
the same period in 1997, is primarily attributed to higher net interest income,
offset by a higher provision for loan losses, and increased non-interest
expense. On a per share basis, basic and diluted earnings per share were $0.82
and $0.81 respectively for the nine months ended September 30, 1998 compared to
$0.74 and $0.73 for basic and diluted earnings per share for the nine months
ended September 30, 1997.
On a quarterly basis, net income for the third quarter of 1998 was $1,408,000
and represents a $143,000 or 11.3% increase over net income for the same period
of 1997. On a per share basis, basic and diluted earnings per share for the
third quarter of 1998 were both $0.28 compared to basic and diluted earnings per
share for the same period of 1997 of $0.25. The increase in net income and
earnings per share for the quarter is due to the same reasons discussed above.
Net Interest Income
YNB's net interest income for the first nine months of 1998 was $16,611,000 an
increase of $2,024,000 or 13.9% from the same period in 1997. The principal
factor contributing to this increase was an increase in interest income of
$7,498,000 resulting from increased loan and security balances, offset by an
increase of $5,474,000 in interest expense. This increase in interest expense
was due to higher volume of time deposits, an increased level of borrowed funds
and the interest expense associated with YNB's Trust Preferred Securities.
The net interest margin (tax equivalent basis) between the yield on average
earning assets and the cost of average funding liabilities, for the nine months
ended September 30, 1998, was 3.61% a 42 basis point or 10.4% decline compared
to 4.03% for the same period in 1997. The principal factors causing the
narrowing of the net interest margin were lower yields on securities and loans,
and higher volume and costs of certificates of deposit and Trust Preferred
Securities.
On a quarterly basis, net interest income was $5,754,000, an increase of
$713,000 or 14.1% when compared to the same period in 1997. The net interest
margin (tax equivalent basis) for the three months ended September 30, 1998 was
3.53%, a 59 basis point or 14.3% decrease for the same period of 1997. The
reasons for the decline were the same as discussed above.
The net interest margin for the 1998 and 1997 comparative periods is negatively
impacted by YNB's Investment Growth Strategy. This strategy involves purchasing
investments utilizing repurchase agreements or other funding sources. The
targeted spread on this strategy is 75 basis points after tax. Because of the
targeted spread on this strategy, there will be a negative impact
18
<PAGE>
to the net interest margin and return on assets. The balance outstanding in the
Investment Growth Strategy at September 30,1998, was approximately $153,293,000
compared to $49,875,000 at September 30, 1997. Conversely, this strategy
increases both return on equity and earnings per share, the primary goals of the
strategy.
Interest Income
For the nine months ended September 30, 1998 total interest income was
$37,321,000, an increase of $7,498,000 or 25.1% when compared to interest income
of $29,823,000 for the same period in 1997. The increase is due to higher
average balances in both loans and securities, which is partially offset by
lower yields on both asset types. Average loans increased $76,786,000 or 22.0%
while the yield declined 8 basis points to 8.79% from 8.87%. The decline in loan
yields reflects strong competition for loans in YNB's market as well as a lower
interest rate environment. The higher average levels and lower yields resulted
in interest and fees on loans for the nine months ended September 30, 1998
increasing $4,862,000 or 21.0% to $28,064,000 from $23,202,000 for the same
period in 1997. Average securities outstanding for the nine months ended
September 30, 1998 increased $58,952,000 or 44.6% to $191,052,000 when compared
to the $132,100,000 for the same period of 1997. Over the same period, the yield
on the securities portfolio decreased 12 basis points to 6.21% from 6.33%. These
factors resulted in interest on securities increasing $2,623,000 to $8,897,000
for the nine months ended September 30, 1998 compared to $6,274,000 for the same
period in 1997. Overall, the yield on YNB's interest earning asset portfolio
decreased 16 basis points to 7.96% for the nine months ended September 30, 1998
from the 8.12% for the same period in 1997.
For the third quarter of 1998, total interest income was $13,209,000, an
increase of $2,952,000 or 28.8% when compared to the $10,257,000 for the third
quarter of 1997. The increase was due to higher outstanding balances in both
investments and loans offset by lower yields on both asset types. Overall yield
on earnings assets for the third quarter of 1998 was 7.92%, a 32 basis point
drop from the 8.24% yield for the same period in 1997.
Interest Expense
Total interest expense increased $5,474,000 or 35.9% to $20,710,000 for the
first nine months of 1998 compared to $15,236,000 for the same period in 1997.
The increase in interest expense for the comparable time period resulted from a
larger deposit base, specifically time deposits, and an increase in borrowed
funds, and the interest costs associated with the Trust Preferred Securities.
Offsetting these factors were lower costs on core savings, money market and
interest bearing checking accounts and lower cost on borrowed funds. The average
rate paid on interest bearing liabilities for the nine months ended September
30, 1998 increased 21 basis points to 4.99% from 4.78% for the same period of
1997. A major factor in the increase in the cost of interest bearing liabilities
is the interest costs associated with the Trust Preferred Securities which
account for 9 basis points or 42.9% of the 21 basis points of increase for the
period.
Interest on time deposits under $100,000 increased $1,557,000 to $8,750,000 for
the nine months ended September 30, 1998 from $7,193,000 for the same period in
1997. This increase was caused by an increase in the average outstanding balance
of $36,190,000 to $202,868,000 for the
19
<PAGE>
nine months ended September 30, 1998, when compared to the average balance of
$166,678,000 for the nine months ended September 30, 1997. During the first nine
months of 1998, YNB offered attractive rates on CDs to fund loan growth.
Interest expense on borrowed funds increased $3,072,000 to $6,348,000 for the
first nine months of 1998 when compared to the $3,276,000 for the same period in
1997. The increase was caused by a $75,198,000 increase in the average balance
outstanding for the nine months ended September 30, 1998 when compared to the
same period in 1997. The rate paid on borrowed funds declined 14 basis points
for the nine months ended September 30, 1998 to 5.60% from the 5.74% for the
same period last year. The primary cause for the increase in interest expense on
borrowed funds is the higher level of borrowings used to fund the investment
growth strategy. The shifting of borrowed funds out of fixed term products into
convertible products at lower interest rates, and to a lesser extent, lower
yields on term repurchase agreements, caused the overall decrease in rate.
Total interest expense for the third quarter of 1998 increased $2,239,000 or
42.9% to $7,455,000 from $5,216,000 for the same period in 1997. The overall
cost of interest bearing liabilities increased 22 basis points to 5.04% from
4.82% in the third quarter of 1997. Approximately 8 basis points or 36.4% of
the increase resulted from the interest expense associated with the
Trust-Preferred Securities. The other factor contributing to higher interest
expense was an increase of $158,708,000 or 36.6% in the average balance of
interest bearing liabilities for the three months ended September 30, 1998 to
$591,826,000 compared to $433,118,000 for the same period in 1997. Offsetting
the increase in the outstanding balances, were lower yields on savings, money
markets and interest bearing checking accounts. In addition, the overall costs
of borrowed funds declined due to the factors listed above.
While YNB desires to fund asset growth with lower cost savings, money markets,
interest bearing checking and non-interest bearing demand deposits, this is not
always possible, as asset growth rates continue to exceed the growth rate in
these deposit types. To meet the required funding needs, YNB anticipates
continued reliance on higher cost retail CDs and, to a lesser extent, borrowed
funds.
Provision for Loan Losses
YNB provides for possible loan losses by a charge to current operations. The
provision for loan losses for the nine months ended September 30, 1998 was
$1,400,000, a 64.7% increase over the $850,000 provision recorded for the same
period of 1997. For the three months ended September 30, 1998, the provision for
loan losses was $500,000, a 81.8% increase over the $275,000 for the same period
in 1997. The increase in the provision was primarily due to the strong loan
growth recorded in both the third quarter and first nine months of 1998,
combined with a higher level of net chargeoffs. Management believes that the
reserve for loan losses is adequate in relation to the credit risk exposure
levels.
20
<PAGE>
Non-interest Income
Total non-interest income for the first nine months of 1998 was $2,216,000 an
increase of $329,000 or 17.4% over non-interest income of $1,887,000 for the
same period in 1997. The increase is primarily due to increases in service
charges on deposit accounts and other non-interest income. Service charges on
deposit accounts increased $60,000 or 6.8% for the first nine months of 1998
compared to the same period in 1997. The increase in service charges is
primarily due to an increased effort to collect charges and fees on deposit
relationships.
YNB also recorded gains on sale of available for sale securities and mortgages,
net, totaling $106,000 for the first nine months of 1998 compared to $32,000 for
the same period last year. The $74,000 increase in gains represent 22.5% of the
total increase in non-interest income. These gains reflect routine sales.
Other non-interest income increased $195,000 or 19.9% for the first nine months
of 1998 compared to the same 1997 period. The increase is principally due to
additional income derived from life insurance assets which totaled $524,000 a
$119,000 or 29.4% increase over the $405,000 for the same period last year and
accounts for 36.2% of the increase in total non-interest income. The increase is
due to higher average balances of life insurance assets. The income earned on
these assets is used to offset expenses on deferred compensation programs.
Management continues to closely evaluate both traditional and non-traditional
sources of new non-interest income as part of a longer-term strategy to increase
earnings.
For the three months ended September 30, 1998, total non-interest income
increased $149,000 or 23.0%. The most important factors accounting for this
increase were a $42,000 increase in rental income received from other real
estate and a $47,000 increase in the earnings on life insurance assets. These
two factors account for 61.1% of the total increase and combined with the issues
discussed above account for the improvement in non-interest income for the
quarter.
Non-interest Expense
Total non-interest expense increased $1,219,000 or 12.4% to $11,089,000 for the
first nine months of 1998 compared to $9,870,000 for the same period in 1997.
The increase in non-interest expenses was primarily due to increases in salary
and employee benefits, equipment expense and other non-interest expense. Total
non-interest expenses, on an annualized basis, as a percentage of average
assets, were 2.22% for the first nine months of 1998 compared to 2.54% for the
same period of 1997. YNB's efficiency ratio for the first nine months of 1998
was 58.9% an improvement over the 59.9% for the same period in 1997. A key
factor for the improvement in these ratios was that asset growth rates exceeded
the growth rate in non-interest expenses. The efficiency ratio is computed by
dividing total operating expenses by net interest income and other income. An
increase in the efficiency ratio indicates that more resources are being
utilized to generate the same or greater volume of income while a decrease would
indicate a more efficient allocation of resources.
Salary and employee benefits increased $511,000 or 9.2% to $6,060,000 for the
first nine months of 1998 compared to $5,549,000 for the same period in 1997.
Salary expense increased
21
<PAGE>
$541,000 reflecting increased staffing levels and normal salary increases.
Benefit expense decreased $30,000 due to reduction in the expenses associated
with post retirement benefits.
Equipment expense increased $129,000 or 15.9% to $938,000 for the first nine
months of 1998 from $809,000 for the same period in 1997. The equipment costs
increase reflects the continuing efforts of YNB to maintain and upgrade
technology in order to provide the highest quality service, increase
productivity, and address Year 2000 issues. YNB is in the process of two
hardware purchases, which will further increase equipment expense. The first is
a $323,000 upgrade to the main frame computer designed to increase capacity and
efficiency. The new improved system will allow YNB to offer new products and
services and to continue to expand its customer base. One of the new services to
be offered is PC Banking. Management believes this product is necessary for YNB
to attract new customers and remain competitive. The second is the $200,000
purchase of a new reader sorter. The new machine will replace the older machine
that was not year 2000 compliant. Management believes that the purchase of a new
reader sorter represents the single largest equipment purchase associated with
year 2000 issues. This continued investment in upgraded technology allows YNB to
operate in a more efficient manner. Better technology increases the productivity
of YNB staff and helps to control salary and benefit costs.
Occupancy expense for the first nine months of 1998 was $781,000, an increase of
$53,000 or 7.3% compared to $728,000 for the same period in 1997. The increase
was due to the leasing of additional space for the East Windsor branch, lease
payments on the new Pennington branch and routine rent increases. In the second
quarter, YNB signed a lease for a 45,000 square foot corporate headquarters
building. This new location will include a full service bank branch and bring
together all senior management in one location. The major benefits of the
corporate headquarters include, room for expansion and improved communication
among the various function areas of YNB. Total overhead associated with the new
headquarters is estimated to be approximately $1,000,000 per year. Management
anticipates occupying the new headquarters in October 1999.
Other non-interest expenses increased $526,000 or 18.9% to $3,310,000 for the
nine months ended September 30, 1998 when compared to the $2,784,000 for the
same period in 1997. Most of the expense increase was related to higher costs
associated with the higher volumes and larger size of YNB. The most significant
increases in other non-interest expense include the following. First,
amortization of the issuance costs of Yardville Capital Trust was $120,000 in
the nine months ended September 30, 1998 and account for 22.8% of the total
increase in other non-interest expenses. Outside fees, including audit,
examination and consulting fees increased $101,000 and account for 19.2% of the
total increase. This increase reflects the use of consultants on various
projects that YNB is involved. One such project involved restructuring certain
checking and interest bearing checking accounts so that these deposits will no
longer be subject to reserve requirements under the Federal Reserve Bank's
Regulation D. This project was successfully completed in April 1998 as discussed
earlier. A key focus of YNB remains controlling the increase in non-interest
expenses.
For the three months ended September 30, 1998 total non-interest expense
increased $451,000 or 13.0% to $3,912,000 from $3,461,000 for the same period in
1997. Total non-interest expenses,
22
<PAGE>
on an annualized basis, as a percentage of average assets were 2.21% for the
three months ended September 30, 1998 compared to 2.61% for the same period of
1997. YNB's efficiency ratio for the three months ended September 30, 1998 was
59.7% an improvement over the 60.8% for the same period in 1997. Salary and
employee benefits increased $240,000 or 12.8% to $2,120,000 from $1,880,000 for
the same period in 1997. Occupancy expense increased $33,000 or 13.0% to
$286,000 from $253,000 for the same period in 1997. Other non-interest expense
increased $139,000 or 13.3% to $1,186,000 from $1,047,000 for the same period in
1997. The causes for these increases were discussed above.
Income Tax Expense
The effective income tax rate was 34.9% for the nine months and 34.1% for the
three months ended September 30, 1998 compared with 35.1% and 35.2% for the same
periods in 1997. The decrease in the effective tax rate was due to an increase
in the amount of tax free income in 1998 when compared to the same periods in
1997.
Year 2000 (Y2K)
General
Issues surrounding the Y2K arise out of the fact that many existing computer
programs use only two digits to identify a year in the date field. Additionally,
Y2K is not just a computer issue, but involves communication, building and
environmental systems as well as office equipment. Y2K readiness can be affected
to the extent that other entities such as loan customers and key vendors are
unsuccessful in addressing this issue. Y2K issues affect virtually all aspects
of YNB's organization. YNB began taking a proactive approach to this issue in
1997. YNB's response includes a written compliance plan. Management believes
that the level of resources committed to the project is adequate and the
oversight provided by senior management and the Board of Directors is
appropriate. YNB is on schedule with its Y2K compliance plan.
State of Readiness
YNB has identified six distinct areas for its Y2K compliance efforts. The
Technology committee, which consists of four directors and all of the executive
management team and System and Operations committee are the primary groups
coordinating YNB's Y2K efforts. The Board of Directors receives monthly
reporting on the progress of YNB's Y2K compliance efforts. In addition, YNB
receives guidance from the Federal Financial Institutions Examination Council
(FFIEC), the formal interagency group responsible for uniform principles,
standards, and procedures for the examination of financial institutions by the
federal regulatory agencies, and participates in scheduled federal Year 2000
examinations. These examinations are being conducted to assess each financial
institution's Year 2000 efforts.
Core Computer Systems: YNB utilizes Information Technology System's (ITI)
software for processing all deposit, loan and general ledger activity. In June
1998, YNB completed preliminary testing of all loan and deposit functions at a
remote disaster recovery site utilizing Y2K testing software purchased from ITI.
Results of the preliminary testing were satisfactory.
23
<PAGE>
Due to the recent hardware upgrades, YNB plans to retest deposit and loan
functions as well as complete testing on general ledger in the first quarter of
1999. Management does not anticipate any major Y2K compliance problems with the
ITI system.
Significant Alliances: YNB depends on many outside vendors and suppliers to
function efficiently. However, Management has identified three systems that have
significant Y2K compliance issues due to their reliance on computer hardware and
software. These systems are the Federal Reserve Bank's Fed Line wire system, The
MAC network which supports YNB's automatic teller machines (ATM) and Automated
Clearing House (ACH) which YNB's uses to process direct deposit activities
including payrolls. The timing of Y2K testing on these outside alliances is
dependent upon when such testing schedules become accessible to YNB. YNB is also
dependent on these outside entities to make required Y2K changes. YNB does
require vendors and suppliers to provide representations that their systems are
Y2K compliant and has a system in place to track vendors Y2K compliance efforts.
Testing for the Fed Line system should be completed by the end of 1998. Testing
on the other two systems is scheduled to be completed by the end of the first
quarter of 1999.
End User Computing: YNB's plan to ensure compliance of desktop computers
throughout the company includes the replacement of non-compliant computers and
related software. All mission critical personal computers are now Y2K complaint.
Technical Infrastructure: The most critical part of YNB's technical
infrastructure is the communication network hardware and software that links all
of YNB's departments and branches to the ITI system and allows them to process
deposit, loan and general ledger activities. To ensure Y2K compliance the
network is tested from each location. To date, all but two locations have been
tested with favorable results. Management does not anticipate any significant
Y2K compliance issues with its network.
Physical Property and Infrastructures: YNB's physical properties and
infrastructures include energy and security systems as well as date sensitive
equipment. Testing in this area continues and management does not anticipate any
significant Y2K issues resulting from this area.
Commercial Loan Relationships: YNB has identified its commercial loan customers
as a potential area of YNB's Y2K exposure. To the extent that a borrower's
financial position is weakened as a result of Y2K issues, credit quality could
be adversely affected. Management has reviewed the commercial loan portfolio to
identify loan types having significant Y2K exposure. Loan calling officers are
in the process of contacting loan customers and assessing their Y2K exposure and
compliance efforts. All significant new commercial loan applications include an
assessment of the Y2K exposure and compliance efforts of the customer. While YNB
continues to closely monitor its commercial loan customers, management cannot
predict whether its customers will be successful in becoming Y2K complaint.
24
<PAGE>
Y2K Program Status
Core Computer Systems Plan: 100% compliant
by 3/31/99. Present Status: 80%
completed.
Significant Alliances Plan: 100% ready* by 3/31/99.
Present Status: 50% completed.
End User Computing Plan: 100% compliant
by 12/31/98. Present Status: 95%
completed.
Technical Infrastructure Plan: 100% compliant by 12/31/98.
Present Status: 80% completed.
Physical Properties and Plan: 100% compliant by 3/31/99.
Infrastructure Present Status: 75% completed.
Commercial Loan Customers Plan: 100% ready* by
3/31/99. Present Status: 60%
completed.
*Ready means having a comprehensive Y2K program in place and a plan that will
achieve compliance before January 1, 2000.
Y2K Costs
YNB's Y2K related costs for 1998 are projected to be approximately $600,000 to
$800,000. This includes approximately $615,000 in equipment related purchases
that will be depreciated over five years. The remaining expense includes
additional compensation expense and costs related to the testing and upgrading
of systems. Management anticipates 1999 expenditures to decline significantly as
most of the significant hardware purchases have been completed. Total Y2K costs
are projected to be $200,000 in 1999. This level could rise in the event that
ongoing testing uncovers unanticipated Y2k compliance issues.
Y2K Contingency Plans
YNB has established Y2K contingency plans as part of its overall disaster
recovery plan. These plans identify all mission critical systems and include
strategies to overcome Y2K related problems. These plans continue to be reviewed
and will be modified from time to time based on the results of the ongoing Y2K
compliance efforts. Management believes that the contingency plans should allow
YNB to continue to operate in the event of Y2K disruptions with a minimum of
disruption and moderate increased costs.
25
<PAGE>
Y2K Risks
The most reasonable worst case scenario for YNB with respect to the Y2K problem
is an adverse affect on the credit quality of its commercial loan portfolio.
This could be caused by the inability of customers to service their bank debt
due to their own Y2K problems or that of their key customers or suppliers. This
could result in lower interest income and higher loan chargeoffs should the Y2K
problems become very serious. Management cannot predict the number of customers
that will experience Y2K related problems or the amount of revenue that could be
lost due to them. In addition, without electrical power and telephone
communication it would be very difficult for YNB to effectively operate.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in YNB's market risk from December 31, 1997
except as discussed below. For information regarding YNB's market risk refer to
the Company's 1997 Annual Report to stockholders.
Changes in Earning Risk
Net interest income over the next twelve-month period indicates a larger risk to
lower rates (-300 basis points) at September 30, 1998 than reported at December
31, 1997. Comparing the simulation results of this low rate scenario to the flat
rate interest rate scenario indicates a -7.4% change in net interest income
compared to -4.4% at year end 1997. The cumulative one-year negative gap closed
to -.0.5% of assets at September 30, 1998 compared to -13.1% at year-end. The
dollar change in the gap was $82,800,000. The reasons for this change in short
term earnings risk profile include:
1) The origination of floating rate commercial loans of $29,000,000.
2) The addition of $92,500,000 of fixed rate and convertible
borrowings, which are non-rate sensitive in lower interests rate
environments but were the primary reason why the costs of borrowed
funds declined in 1998.
3) An increase in certificates of deposit of $22,300,000 with
maturities greater than one year.
At the same time as liability durations extended, prepayment speeds on mortgage
backed securities have increased and this has increased investment cash flows
considerably. Management has taken steps to sell faster paying mortgage pools
and purchase lower coupon mortgage backed securities with slower prepayment
speeds. Management actively manages and monitors the interest rate risk position
of YNB.
Changes in Market risk
With the addition of callable repurchase agreements and FHLB advances, the
market risk profile of YNB has changed. Management measures market risk by
changes in the Economic Value of Portfolio Equity (EVPE) as a percentage of
total assets with rate shifts of +/- 200 basis points.
26
<PAGE>
EVPE analysis is an indication of long-term market risks in the balance sheet.
It measures the present value of asset and liability cash flows based on current
inventory and market rates to determine the present value of equity. The present
value of equity is subsequently measured by shifting interest rates by +/- 200
basis points to observe the variances as a percentage of total assets. It is
management's intention to maintain modest changes in this measure with a target
of below 3%.
At September 30, 1998, the EVPE changes by -2.08% for rate shifts of +200 and
- -2.14% for rate shifts of -200 basis points. The non-symmetry of the results is
indicative of the callable funding booked in 1998. This compares to changes of
- -1.80% and 0.00% respectively at December 31, 1997.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable.
Item 2: Changes in Securities and Use of Proceeds
Not Applicable.
Item 3: Defaults Upon Senior Securities
Not Applicable.
Item 4: Submission of Matters to a Vote of Securities Holders
Not Applicable.
Item 5: Other Information
Not Applicable
Item 6: Exhibits and Reports on Form 8-K
See attached exhibits. There were no Form 8-K reports filed during the quarter
for which this report is filed.
27
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(H) 3.1 Restated Certificate of Incorporation of the Company, as amended by the
Certificate of Amendment thereto filed on March 6, 1998.
(B) 3.2 By-Laws of the Company
(B) 4.1 Specimen Share of Common Stock
(I) 4.2 See Exhibits 3.1 and 3.2 for the Registrant's Certificate of Incorporation and
By-Laws, which contain provisions defining the rights of stockholders of the
Registrant.
(I) 4.3 Amended and Restated Trust Agreement dated October 16, 1997, among the
Registrant, as depositor, Wilmington Trust Company, as property trustee, and the
Administrative Trustees of Yardville Capital Trust.
(I) 4.4 Indenture dated October 16, 1997, between the Registrant and Wilmington Trust
Company, as trustee, relating to the Registrant's 9.25% Subordinated Debentures
due 2027.
(I) 4.5 Preferred Securities Guarantee Agreement dated as of October 16, 1997, between
the Registrant and Wilmington Trust Company, as trustee, relating to the
Preferred Securities of Yardville Capital Trust.
(D) 10.1 Employment Contract between Registrant and Patrick M. Ryan.
(D) 10.2 Employment Contract between Registrant and Jay G. Destribats
(G) 10.3 Employment Contract between Registrant and Stephen F. Carman
(G) 10.4 Employment Contract between Registrant and James F. Doran
(G) 10.5 Employment Contract between Registrant and Richard A. Kauffman
(G) 10.6 Employment Contract between Registrant and Mary C. O'Donnell
(G) 10.7 Employment Contract between Registrant and Frank Durand III
(G) 10.8 Salary Continuation Plan for the Benefit of Patrick M. Ryan
</TABLE>
28
<PAGE>
INDEX TO EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(D) 10.9 Salary Continuation Plan for the Benefit of Jay G. Destribats
(E) 10.10 1988 Stock Option Plan
(A) 10.11 1994 Stock Option Plan
(A) 10.12 Directors' Deferred Compensation Plan
(B) 10.13 Lease Agreement between Jim Cramer and the Bank dated November 3, 1993
(A) 10.14 Lease between Richardson Realty Company and the Bank dated November 18, 1994
(A) 10.15 Agreement between the Lalor Urban Renewal Limited Partnership and the Bank dated
October, 1994
(C) 10.16 Survivor Income Plan for the Benefit of Stephen F. Carman
(C) 10.17 Lease Agreement between Devon Inc. and the Bank dated as of February 9, 1996
(F) 10.18 1997 Stock Option Plan
(G) 10.19 Employment contract between Registrant and Howard N. Hall
(G) 10.20 Employment contract between Registrant and Sarah J. Strout
(G) 10.21 Employment contract between Registrant and Nina D. Melker
(G) 10.22 Employment contract between Registrant and Timothy J. Losch
(G) 10.23 Survivor Income Plan for the Benefit of Timothy J. Losch
(G) 10.24 Lease Agreement between the Ibis Group and the Bank dated
July 1997
(H) 10.25 Lease agreement between Hilton Realty Co. of Princeton and the bank dated March
31, 1998.
</TABLE>
29
<PAGE>
INDEX TO EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(H) 10.26 Amendments to the 1994 Stock Option Plan.
(J) 10.27 Lease agreement between Crestwood Construction and the Bank dated May 25, 1998
(J) 10.28 Lease addendum between Gardeners Property Partnership and the bank dated March
1998.
27.1 Financial Data Schedule
(A) Incorporated by reference to the Registrant's Annual
Report on Form 10-KSB/A filed on July 25, 1995
(B) Incorporated by reference to the Registrant's Registration Statement on Form
SB-2 (Registration No. 33-78050)
(C) Incorporated by reference to the Registrant's Annual
Report on Form 10-KSB for fiscal year ended December
31, 1995
(D) Incorporate by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996
(E) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 1997, as amended by Form 10-Q/A filed on August 15,
1997
(F) Incorporated by reference to the Registrant's Registration Statement on Form S-8
(Registration NO. 333-28193)
(G) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997
(H) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
31, 1998, as amended by Form 10-Q/A filed June 9, 1998
(I) Incorporated by reference to the Registrant's Registration Statement on Form S-2
(Registration Nos. 333-35061 and 333-35061-01)
(J) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 1998.
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YARDVILLE NATIONAL BANCORP
--------------------------
(Registrant)
Date: November 13, 1998 By: /s/ Stephen F. Carman
-------------------- ------------------------------
Stephen F. Carman
Executive Vice President and
Chief Financial Officer
31
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,080
<INT-BEARING-DEPOSITS> 1,360
<FED-FUNDS-SOLD> 3,870
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 192,614
<INVESTMENTS-CARRYING> 28,111
<INVESTMENTS-MARKET> 28,445
<LOANS> 459,467
<ALLOWANCE> 6,229
<TOTAL-ASSETS> 725,672
<DEPOSITS> 487,571
<SHORT-TERM> 178,871
<LIABILITIES-OTHER> 7,157
<LONG-TERM> 11,500
0
0
<COMMON> 20,399
<OTHER-SE> 20,174
<TOTAL-LIABILITIES-AND-EQUITY> 725,672
<INTEREST-LOAN> 28,064
<INTEREST-INVEST> 8,897
<INTEREST-OTHER> 360
<INTEREST-TOTAL> 37,321
<INTEREST-DEPOSIT> 13,564
<INTEREST-EXPENSE> 20,710
<INTEREST-INCOME-NET> 16,611
<LOAN-LOSSES> 1,400
<SECURITIES-GAINS> 70
<EXPENSE-OTHER> 11,089
<INCOME-PRETAX> 6,338
<INCOME-PRE-EXTRAORDINARY> 6,338
<EXTRAORDINARY> 6,338
<CHANGES> 0
<NET-INCOME> 4,124
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 7.96
<LOANS-NON> 2,320
<LOANS-PAST> 1,224
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,570
<CHARGE-OFFS> 784
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 6,229
<ALLOWANCE-DOMESTIC> 6,229
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
